Market Overview

Americas: Regional Economic Review - 4Q 2013


Americas: Developed Country Outlook Stays Positive, Emerging Economies Face Headwinds

The outlook for the developed economies in North America remains healthy while the emerging economies of Latin America continue to face headwinds. Though recent data from the U.S. and Canada have indicated moderation in economic activity, most of the slowdown was likely caused by adverse weather conditions in the region. These economies are expected to regain pace in the coming months as seasonal factors subside. Despite the phased withdrawal of its bond purchases by the Federal Reserve, monetary policy remains accommodative in the U.S. as well as in Canada. The fiscal outlook for both countries has also improved, especially after policymakers in the U.S. agreed on increasing the country’s debt ceiling. This helped avoid a repeat of the political standoff and subsequent government shutdown in October last year which dented business and consumer sentiment.

Meanwhile, most Latin American countries are facing slower growth as global demand for industrial commodities remains subdued. Prices of iron ore and copper have slipped further this year on concerns over slower growth in China and other emerging economies in Asia. Domestic consumption growth has also moderated in recent quarters as select central banks have been forced to increase interest rates to limit inflation risks. The steep fall in their currencies have also contributed to inflation, though the cheaper currencies have made their exports relatively more competitive and cushion the decline in export revenue from lower commodity prices.


At a Glance


United States:While some of the recent economic data have been more subdued than forecasted, the economy is expected to gather pace as extreme weather conditions in select parts of the country subside. The Federal Reserve has started the phased withdrawal of its bond purchases, and is expected to end the program completely by the end of this year.


Canada:The economy expanded at a faster than expected pace during the last quarter of 2013. While softer U.S. demand due to adverse weather conditions could hurt Canadian exports during the beginning of 2014, the economy is expected to gain momentum later in the year, sustaining last year’s growth rate.


Brazil:  While growth for the last quarter of 2013 exceeded expectations, the economy is likely to slow this year as global demand for commodities remain subdued. The central bank continues to hike interest rates, as inflation risks remain elevated, which could restrict domestic consumption.


Mexico:  The decline in the country’s manufacturing sector has negatively affected the pace of growth in recent months. However, revival in U.S. demand could potentially lift the outlook in coming months.


Chile:  Economic growth for 2013 was the slowest in more than four years, as subdued international commodity prices have limited industrial investments. Further decline in copper prices have weakened the outlook for this year.


Peru:Though economic growth for 2013 was lower than the previous year, it exceeded expectations as the country’s mining output increased. The government and the central bank are hopeful of maintaining the stride this year.


Colombia:Increased construction activity and higher farm output helped the economy expand at a faster pace during the last quarter. The central bank continues to hold interest rates steady as inflation remains benign.


Argentina:Erosion of its foreign currency reserves forced the country to end currency market intervention and let the peso depreciate substantially. However, the economic outlook remains weak as capital continues to flow out.




Recent economic data have been softer than expected and have led to renewed concerns about sustainability of growth, but it is believed that seasonal factors were likely behind the moderation. Several parts of the country have seen extreme winter weather, which has disrupted businesses and forced consumers into postponing purchases of durables and high value goods. The moderate gains in gasoline prices have also likely played a part in restricting consumer spending recently. However, consumer confidence surveys are showing a revival in sentiment, which could lift domestic demand in the coming months.

U.S. GDP growth for the last quarter of 2013 was revised lower, but some of the underlying trends suggest favorable conditions for growth in coming quarters. The economy expanded 2.7% annualized, compared to 4.1% during the previous quarter, as growth in consumer spending and exports was lower than earlier estimates. However, business investments increased at a faster pace, suggesting that companies are now poised to deploy the record amount of cash reserves needed to build additional capacity as demand improves. The housing market remains healthy as average home prices continue to trend higher. External trade data indicate that exports have maintained the moderate pace of growth in recent months.

Severe weather also likely contributed to the weaker than expected job additions in December, but the trend is expected to turn for the better as the weather improves. After adding more than 500,000 jobs during the first two months of the quarter, job gains slowed significantly to 84,000 in December. However, the unemployment rate declined to 6.7% from 7.3% at the beginning of the quarter.

The Federal Reserve has so far reduced its monthly pace of bond purchases by $20 billion and is expected to wind down the program completely before the end of 2014. The phased withdrawal of quantitative easing has so far not triggered a rise in bond yields. This is partly due to renewed investor interest in treasuries as economic growth appeared to be faltering at the beginning of this year. The Fed continues to maintain its forward guidance on the target Fed funds rate, which is now expected to remain at the current levels through most of 2015. However, the minutes of recent Fed meetings revealed that some members of the policy body are in favor of increasing interest rates earlier. Any changes in the Fed’s forward guidance on the policy rate could push up treasury yields and mortgage rates.


Stronger than expected consumer spending and inventory buildup helped the Canadian economy top growth forecasts during the last quarter of 2013. GDP growth accelerated to 2.9% annualized during the period, faster than the central bank’s earlier forecast of 2.5%. For the year 2013, the economy expanded by 2.0%, against 1.7% for the previous year. Healthy gains in consumer spending and exports helped overcome a moderate decline in investments during the last quarter.

While concerns of overheating remain, Canada’s housing sector continued to expand during the quarter. Average prices for new homes ended at the highest level in recent years in December. New building permits and housing starts were also steady during the last quarter of 2013. Exports saw only a marginal increase in December, as adverse weather conditions likely restricted demand in the U.S., Canada’s major export market. Imports increased at a faster pace and the trade deficit widened more than anticipated. The economy lost 44,000 jobs during the month of December and the unemployment rate increased to 7.2, pointing to a labor market that is possibly losing steam. The federal government is expected to cut spending in 2014, aiming to eliminate the budget deficit by 2015. This could limit potential labor market gains later in 2014, as well as the following year.

The Bank of Canada continues to keep its benchmark overnight rate at 1%, and reiterated that excess capacity and increased competition would likely limit inflation risks this year. The bank remains positive about the growth outlook, and expects the economy to expand 2.5% this year.


Brazil expanded faster than expected during the last quarter of 2013 as higher capital investments countered a decline in factory output. The economy expanded 0.7% during the period, when compared to the previous quarter. For the year 2013, GDP increased 2.3% as investments improved by 6% after the previous year’s decline. Household consumption, exports and industrial growth all saw more moderate growth rates during last year. The government is continuing its efforts to revive the economy and is moving ahead with infrastructure investment projects totaling nearly $290 billion. Nevertheless, economic growth for the current year is expected to fall short of 2% as global demand for commodities remain subdued.

The central bank has repeatedly increased its benchmark rates as inflation risks remain elevated despite the growth slowdown. The bank raised interest rates by another 25 basis points in February and indicated that more increases are on the way. Consumer price inflation has slowed from last year, but remains close to the upper end of the central bank’s target range and is expected to increase later in 2014. To lower inflation risks, the government has announced further cuts in budgetary spending.

Brazil’s trade account balance deteriorated in 2013, as exports of manufactured goods moderated and consumer goods imports increased. Nevertheless, sustained industrial investment inflows from abroad limits balance of payments risks for the country. All the three major credit rating agencies have lowered their outlook for the country, citing the decline in the country’s external trade account and government finances.


The Mexican economy slowed appreciably in 2013 as industrial output stalled and growth in the services sector declined. GDP growth slipped to 1.1% for 2013, the lowest since 2009, compared to 3.9% during the previous year. During the last quarter of 2013, the Mexican economy saw only a marginal expansion from the previous quarter. Construction activity saw a rebound during the period, while manufacturing declined further. The central bank and most other forecasters expect economic growth to rebound to more than 3% during the current year.

Continuing weakness in the manufacturing sector has been one of the major reasons behind the economic slowdown in Mexico in 2013. Auto manufacturing is the only major industry that continues to see stable growth, as Mexico became the second largest exporter of cars to the U.S.. Mexico is expected to export nearly 1.7 million vehicles to the U.S. this year, fewer than only Canada. However, it is likely that the lower export demand for manufactured goods during the last quarter of 2013 was mostly the result of adverse weather conditions in the U.S. and could recover in coming months. Consumer sentiment could come under pressure after select consumption taxes are increased during the first quarter of 2014.

The Mexican central bank continues to hold its benchmark rate steady, to support domestic consumption and help the economic recovery. Annual inflation moved close to 4% in December, the upper end of the bank’s target range, but core inflation remains benign. The central bank is not expected to change its interest policy in 2014, even though several other emerging countries have seen rate hikes recently to reduce inflation risks and prevent currency depreciation. The government’s efforts to open up its key energy sector to foreign businesses encouraged rating agency Moody’s to lift Mexico’s rating.


The Chilean economy continues to slow down as lower international prices of copper and other industrial commodities have led to a decline in investments. Economic growth is estimated to have slackened to 4.1% in 2013, the slowest in four years, as domestic consumer spending partly offset weak exports. Economic activity appeared to have slipped further at the beginning of this year, as the country’s statistical agency said GDP growth declined to 1.4% annualized in January. This was well below expectations as the economy contracted from the last month of 2013. Further weakness in the manufacturing sector was the main reason behind January’s poor growth.

To revive the economy, Peru’s central bank has repeatedly lowered its benchmark rate in recent months. The policy easing is considered vital to sustain growth in domestic consumer spending, which expanded more than 6% in January this year. Relatively subdued inflation data has also helped shape the central bank’s accommodative policy, as consumer price inflation remained below its target during the month of January. However, inflation picked up in February as fuel prices trended higher. Nevertheless, the central bank is expected to lower the benchmark rate further in the short term.

Weak labor markets are another challenge facing the Chilean government and central bank, as the number of workers in mining and farm sectors have slipped. The unemployment rate increased to 6.1% in January and, if it rises further in subsequent months, could hurt domestic demand. The Chilean peso has weakened nearly 10% over the last six months, and could potentially help exports from the country and partly offset the lower copper prices.


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